Latest Stories

Latest Stories

Auditing in the Classroom Is Changing

The new, computerized CPA exam calls for fresh teaching methods.

BY NICHOLAS J. JR MASTRACCHIO

Related

TOPICS

Uncategorized Article

This month the new, computerized version of the
Uniform CPA Exam replaces its paper-and-pencil
predecessor. The computer-based test is a joint
effort by the AICPA, NASBA and Prometric, a
developer of technology-based testing services.

Today’s students are getting auditing
training that doesn’t resemble the instruction you
experienced. Changes in the profession, in technology, in
the audit world and in accounting education are bringing
about academic retooling to better prepare future staff
members to meet the demands of becoming a CPA and to perform
audit tasks. The geographic restrictions of the
paper-and-pencil exam are a thing of the past. Candidates
can sit for the exam up to four times each year and can take
each part separately anywhere in the United States (see “
Tips on Preparing Employees for the New CPA Exam, ”
JofA , Mar.04, page 11). Besides that
flexibility, the new exam makes improvements in the areas of
security and candidate skills assessment. My colleagues and
I want to heartily encourage practitioners to spend some
time in the classroom with us to participate in training the
young men and women who will become your staff, protgs and
partners—as well as the profession’s standard bearers.

EDUCATION IS THE KEY
Recent accounting lapses have
highlighted how important an efficient and impeccable audit
is to business health, but even in 2000—before Enron and
subsequent misdeeds came to light—the AICPA along with the
American Accounting Association, the Institute of Management
Accountants and the Big 5 accounting firms had sponsored a
study of accounting education. The published results,
Accounting Education: Charting the Course through a
Perilous Future by W. Steve Albrecht and Robert J.
Sack (
www.aicpa.org/edu/accteduc.htm ), urged many changes
in the way the profession prepares accounting students.

The study found

Too much emphasis on memorization, with tests
that were based primarily on recall.

Too much reliance on lectures, on textbooks as
lesson plans and on “faculty knows best” attitudes.

Widespread academic reluctance to develop
creative types of learning, such as assignments with real
companies, teamwork, case analyses, oral presentations, role
playing, team teaching, technology assignments, videos,
writing assignments, involvement of business professionals
in the classroom and the study of current events.

Academic resistance to using out-of-classroom
experiences such as internships, field studies, foreign
business trips, service-learning assignments, observation of
professionals in the work environment and e-mail
correspondence with practitioners.

How to
Participate

CPAs interested in
helping to bring the benefit of their experience
into the classroom can do the following:

Contact the accounting department at
a college near you.

Find out the name of the auditing
professor. Contact him or her, express your
interest and request a syllabus.

Explain to the professor where your
experience and his or her topics coincide.

Offer to participate in classroom
discussions.

The time you commit will
depend on your willingness to participate and on
the course structure. A class where students
discuss the risks in an industry you are familiar
with may not require much preparation time. More
preparation time might be necessary if you comment
on a case presentation in a less familiar
industry. Depending on the program, you might
choose to attend multiple sections of the course.

Besides the fact that students and faculty
will appreciate your contribution, it will give
you the opportunity to have students get to know
you and your firm outside the campus-recruiting
environment.

OPPORTUNITY TO UPGRADE
Many practitioners remember
auditing instruction based on memorization. Some of us were
required to recall the 10 auditing standards and identify
departures from them in a given example. After memorizing
the standard report, we had to write an audit report based
on a set of facts. That was solid conceptual training, but
it didn’t show the potential variables of an actual business
situation.

This month the new, computerized CPA exam
will begin operating and will make a radical change in the
proficiencies it tests. An AICPA paper, “Skills for the
Uniform CPA Examination,” defines what the exam will cover (
www.cpa-exam.org ).
The competencies are

Analysis: the ability to organize,
process and interpret data to develop options for decision
making.

Judgment: the ability to evaluate
options for decision making and provide an appropriate
conclusion for the situation.

Communication: the ability to
effectively elicit and express information through written
or oral means.

Research: the ability to locate and
extract relevant information from available resource
materials.

Understanding: the ability to
recognize and comprehend the meaning, influence and
application of a particular matter.

Accordingly,
those of us who teach accounting have been modifying how we
do so, and in today’s curriculum an auditing course looks
quite different. One change is that professors are looking
more at the CPA exam content when developing their courses.
Although this practice might have had a questionable
implication previously, one professor I know says
structuring a course around the new, computerized exam is
appropriate because the technology adjusts the exam
requirements to give each person what is, in effect, a
different test of content and skill. In that respect the
exam now mirrors the real world—the examinee must know the
principles and rules and correctly adjust his or her
performance to a set of circumstances.

There are
various ways to reconstruct an auditing course to improve it
using the Albrecht and Sack report and the new CPA exam as
guides.

ALL THINGS IN PROPORTION The auditing portion of the revised
CPA exam weights the content as follows:

22%–28% —Planning the engagement,
evaluating the prospective client, deciding whether to
accept or continue the engagement and entering into an
agreement with the client. (The large percentage of exam
weight allocated to this topic should inspire instructors to
emphasize this more in the classroom.)

12%–18% —Considering internal
controls in both manual and computerized environments.

3 2%–38% —Substantive testing, that
is, obtaining and documenting information to form a basis
for conclusions (and independently evaluate the client’s
controls). (The comparative percentages for internal control
and substantive tests may be misleading. Some allocation
difference is due to the subtopics under this category,
including accounting and review services and statistical
sampling.)

8%–12% —Review of the engagement to
provide reasonable assurance that the objectives were
achieved and information to document engagement conclusions
was obtained.

The
regulations part of the exam asks
questions about topics typically covered in an auditing
course. This portion of the exam (15%–29%) is devoted to
issues that encompass ethics and CPAs’ professional and
legal responsibilities.

Modern developments may have
made auditing too big a topic to cover in one course, and
some schools now offer two. At the University at Albany in
New York, we no longer teach internal control and computer
auditing in the auditing course but include them in an
information systems course.

LESS ROTE, MORE THOUGHT At Albany we divide students into groups of three or
four on the first day. These groups work together for the
duration of the course. We try to keep lectures to a minimum
and to emphasize developing their research, writing and
oral-presentation skills and ability to analyze audit
information. To give the students a feel for an actual
business audit, we assign work that focuses on an industry
and a transaction cycle. Practitioners who visit and talk
about what actually happens in the workplace are especially
helpful (see “ How to Participate ”). We
cover

Regulation. Students learn about
independence and audit failure as well as the
standard-setting process. The groups discuss regulation as
it pertains to

The CPA profession (and the concept of
professionalism in general). Students draw
conclusions about the self-discipline it takes to be a CPA.
We discuss the profession’s history with respect to
self-regulation, why the PCAOB has taken over standards for
auditors of public companies and how and why state boards of
accountancy have been increasing their regulatory oversight.

Ethics. We look at the relationship
between ethical conduct and complying with a set of rules;
we compare SEC, AICPA, GAO, state and other countries’
independence rules. (Ethics and legal liability are getting
more public attention now than in the past, which will, I
hope, lead to more emphasis on ethics throughout the
curriculum as well as in the auditing classroom.)

Licensure. CPAs are licensed by their
state, and we discuss with students the profession’s concern
about the complexity of different state licensure
requirements because some large-firm partners must be
licensed in numerous states. We discuss the Uniform
Accountancy Act and the advantages and disadvantages of
states’ accepting licensees from another state under the
concept of substantial equivalency. The students discuss
another alternative—a possible national CPA license—a
sometime topic at state board meetings. A state board member
attends a session to provide insight.

Legal liability. Some of the groups
trace the history of privity and the right of third parties
to sue CPA firms.

Planning. Students need to know that
procedures may legitimately vary by engagement, and that
their choices will depend on a number of factors:

Auditing standards. We talk about who
issues generally accepted auditing standards and the impact
of PCAOB-issued standards. Other discussion questions focus
on, for example, the objective of an audit of financial
statements and private- vs. public-company standards. We
talk about how auditing standards are used as a guide to the
underlying concepts and objectives of an audit. We talk
about Sarbanes-Oxley and about the recent changes mandated
for the audits of public companies.

Assess engagement risk. We discuss how
to assess the types of risks an audit may involve. The
groups research the history of the expectations for the CPA
to discover fraud. Each looks into its assigned industry and
identifies its unique, inherent control and detection risks.
The groups examine the provisions of SAS no. 99 and, based
on the guidance provided and its research into the industry,
identify potential fraud areas. We discuss the issues in
current fraud cases. It’s helpful if CPAs from industry and
public practice visit and comment on industries they are
familiar with and explain why fraud is difficult to detect.
AICPA audit guides, the assessments of participating CPAs
with specific industry experience and other sources all
assist students in this area.

Analytical procedures: We look at case
studies to show how the proper use of such procedures can
identify potential problem areas.

Other planning topics: We discuss
issues about client acceptance, staffing, use of other
auditors and internal control staff, communication with a
predecessor auditor and the use of a specialist.

Internal control. We describe
elements of internal control that lead to exercises that
require the groups either to evaluate a system of internal
control for a transaction cycle or develop an internal
control questionnaire for such a cycle.

Overview: Using the industry assigned
and its previously identified risks, students develop a
control system that minimizes those risks. CPAs from
industry and public practice can enhance course content by
attending students’ presentations on industries they are
familiar with and discussing the risks and the controls that
can minimize them.

Transaction cycles. The groups,
assigned a transaction, now develop an audit program
covering that industry. They make a presentation that
discusses the nature of their assigned industry, its risks,
and what audit procedures would be appropriate considering
risk and materiality. Guest CPAs can add their insights in
these discussions, too.

Review. We explore the evaluation of
evidence and the use of analytical procedures. The groups
discuss a case on going-concern issues and determine whether
there is substantial doubt in regard to a company’s ability
to continue as a going concern.

Audit reports. Based on various
scenarios involving going concern, scope limitation, GAAP
and other issues for actual (but unidentified) companies,
each group presents an opinion letter to the class with
references to GAAS and GAAP as justification for departures
from an unqualified opinion. We then compare their reports
with the actual reports.

Jan R. Williams, CPA and
Ernst & Young Professor and Dean of the College of
Business Administration at the University of Tennessee at
Knoxville, says the following aspects of the exam make for a
good prescription to improve many accounting curricula:

Increased literacy expectations regarding both
the use and knowledge of technology.

My colleagues
and I hope this view into accounting course design will show
practitioners how colleges are responding to the call to
strengthen the CPA profession. Our aim is to prepare
accountants with improved entry-level skills, who understand
what a real-world practice entails and who consistently
perform at a high ethical level. By acting on the
suggestions presented in this article to spend some time in
the classroom working with us, your firm can be part of
developing and teaching the new auditing curricula.

NICHOLAS J. MASTRACCHIO Jr., CPA, PhD, is associate
accounting professor at the University at Albany School of
Business in New York. He is the author of Mergers and
Acquisitions of CPA Firms: A Guide to Practice Valuation,
AICPA, 1998, and of many articles. His e-mail address
is njm@lcszcpa.com .

RESOURCES

Web site For more
information on how to help aspiring CPAs learn more
about the accounting profession and the career
opportunities available, go to the AICPA Web site
www.startheregoplaces.com .

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.